RETAILER TIERS CAN DETERMINE PRIVATE-LABEL STRATEGY

Robert Vosburgh

Today's mix of supermarket formats reflects just how many options consumers have in purchasing the same product, whether it's detergent, cookies or tomato sauce. While national brands are present in just about every venue, private label has emerged as a cornerstone in defining the more specific roles these various retailers play in the marketplace.

Not too long ago, the conventional supermarket was the primary -- and sole -- destination for most fresh and packaged food items; today, consumers can purchase canned tuna in drug stores, convenience stores, mass merchandisers and warehouse clubs, among others. Private-label products mark the point of differentiation. The question of which products to stock, and how much, is the key to success, according to veterans of the private-label business.

"I think most of our industry analyzes the consumer shopping experience on the basis of size-of-store," said Brian Sharoff, president of the Private Label Manufacturers Association, New York. "There are supercenters and supermarkets, and then there are smaller neighborhood stores. It's this square-footage analysis that's obscuring what's really going on."

"What's going on" is that people are shifting their shopping habits in order to find the item they're looking for. This is especially true when it is a private-label product because it's not available anywhere and everywhere else. As the category matures, retailers need to determine where they belong on the private-label spectrum, and tailor their programs to maximize the sales potential, according to Sharoff.

"It's old hat to believe that the consumer regularly shops at three similar supermarkets anymore, and makes choices based on one being better than the others, for one product," he said. "That may have been true 15 years ago. Now, most people divide their shopping into three separate destinations, as opposed to going to the same format for three different things."

The distinction is important in a crowded, consolidated marketplace, because as an ambassador of the store, private-label products need to reflect a retailer's standards.

The first tier of retailers is "a perfect home for private label," Sharoff said, because these retailers are big enough to establish a strong identity. Here, price is the the focus, and the category is extremely attractive to consumers.

One such operator, K-VA-T Food Stores, Abingdon, Va., takes a three-pronged approach to market. According to Rich Gunn, vice president of grocery operations, nearly half of his customer base earns less than $30,000 a year -- so price is a primary purchase factor.

"Traditionally, private label was looked at as a profit enhancer. Not only is it a profit enhancer [for us], we've actually positioned our private label to be a competitive advantage," he said. "Nobody else who we compete against in our marketplace -- which is Kroger, Food Lion, Ingles, Wal-Mart Supercenters -- offers what we have, at our prices."

K-VA-T's Valu Time label, which includes 400 basic items like canned vegetables (29 cents) and peanut butter (18 ounces for 99 cents), is built around the chain's larger everyday-low-pricing umbrella.

"There's a big need [for low prices] throughout a lot of our towns and communities because people are financially challenged, and the Valu Time program is EDLP, made of items that have very high volume, but are value-priced," Gunn said.

Under these pricing scenarios, volume is key to generating profit since price alone won't support it, Sharoff added.

"Clearly, the stores that are involved with this [tier] are those with tremendous buying power, because without it, you can't offer the pricing consumers expect when they shop for these basics," he said.

The chain also has upscale store brands. Its premium Food City and Food Club labels offer a premium option, and is K-VA-T's biggest private-label player. The more than 2,300 items include soft cookies, chips and new dairy products.

"We usually outcut national brands just about every time we do a lab test. We do extreme promotions with it, like buy-one, get-ones and things like that," Gunn said. "When you walk through the store, you see we promote almost every Food Club item we've got. We have our ValuCard frequent shopper card, and just about all our Food Club items are on ValuCard every single day."

Typically, sales of Food Club/Food City items double normal movement anytime the retailer conducts a BOGO promotion. In many cases, it's four and five times normal movement, said Gunn. The newest additions to the line are fluid dairy in white, opaque containers and ice cream. The latter is a line of 16 flavors, supported by 12 "Flavor of the Month" varieties that will be rotated in and out depending on the season, he said.

"We had an earlier private label [in ice cream], but we moved it up a notch," said Gunn. "We were looking for some unique flavors, so we added six new flavors to our profile and developed a "Flavor of the Month" ice cream, like peppermint during the holidays, or blueberry cobbler for the summer."

K-VA-T also has a health and beauty care line called Top Care, which encompasses 500 internal and external HBC products.

The next set of retailers are those who are predominately regional, and are in a better position to offer value-added, private-label products due to their smaller size. Here, price is not so much a factor, according to Sharoff.

"The second tier does a good job of being responsive to their marketplace. Price is not as important to them as satisfying the consumers in a variety of departments that really expand what a supermarket is all about," he said. "Whether it's seafood or produce or bakery, they are taking that next step beyond selling commodities on price."

Schnuck Markets, St. Louis, made a splash this summer when it introduced a complete line of frozen dinners under the Dining In label, supplied by Topco Associates, the Skokie, Ill.-based cooperative wholesaler. The rollout followed the successful launch earlier in the year of Dining In pizzas to all 100 stores in the retailer's six-state market area.

"Every one of the [second-tier retailers] is adding value by selling value-added private label," said Sharoff. "It could be a health-and-wellness line, a gourmet food line or kids' foods. Much of it is done through their private brands because that's what they have control over."

For example, the four varieties of Dining In pizzas include self-rising crusts, thicker sauces and six-cheese toppings. Keith Shannon, frozen foods category manager for Schnucks, said the line adds value through variety and ease of preparation.

"Dining In is a proprietary brand, which in nearly all of our markets will be exclusive to Schnucks," he said.

The third, and final, tier is made up of specialty operators, who define themselves in a more limited way. They're not attempting to sell everything the first tier is, or trying to be a regional operator. They are stores that have taken a single niche within the traditional supermarket, and specialize in it, such as cheese, wine or coffee.

Or natural foods. Mustard Seed Market & Cafe, with units in Akron and Solon, Ohio, is one of these unique retailers who cater to the demand for wholesome food, supplements and related products by offering what everybody else cannot afford to sell, according to Phillip Nabors, president of the two-unit operation.

"We love blind items -- those that you can't find down the street at all -- because you're able to sell those at the price you choose," rather than what your competitors do, he told SN. "In many cases, we're dealing with small, local, artisan companies. So, we may not be doing private label, but we're finding [the equivalent]."

Indeed, Sharoff believes that third-tier retailers use private label precisely because there are no national brands available to them.

"There's no well-known, national brand of Italian lemon soda; there's no special brand of peach salsa," he noted. "The retailer has identified a series of departments that they're going to devote their entire store to, and in that sense, establishes their private label."

Mustard Seed offers private label only in some areas, like bottled water, supplements or lip balm, because it has been able to find manufacturers willing or able to run small enough batches that match Mustard Seed's two-store volume.

"What we're not able to do, and what we'd really like to do, is what I consider grocery items because we're not big enough to command volumes to really do the runs in that area," Nabors lamented. "We can't do a corn chip, a tomato sauce or a soy milk. We can't do the items we'd like to do because we're too small."

To remedy that, Nabors met recently with other large independent natural foods retailers, in non-competing markets, to create a proprietary brand between all of them. The plan is to pool their buying power, offer the same package, and command the volume.

"We all have the same competitors in Whole Foods, Wild Oats and Trader Joe's, who have the buying power to provide their customers with private label," Nabors added. "We need to compete. So by pooling together, we should be able to achieve that."

Nabors said he expects he could offer some 100 stockkeeping units of the top, most-popular items at prices that satisfy consumers and still provide him with a good margin.

"We have a unique opportunity to build [store] brands because our customers come here seeking unique items," he said. "So, we have perhaps a greater opportunity in some instances to sell them the brands because they trust us. We have an opportunity to play a different game [than regular supermarkets]."

Private-label vendors have tried to create products for Mustard Seed and similar, third-tier retailers, but not at a competitive enough price. Nabors said the products could be great, the volume requirements could be satisfied, but the "price-value proposition" just isn't there.

"The items tend to be museum-priced," he said. "I need to manage our price-value image in a way that's competitive in the marketplace. I don't need a bunch of expensive stuff even if it is good quality, with my name on it. That only fuels the, 'Hey honey, this place is expensive. Let's get out of here' perception."

Nabors points out that he doesn't want to compete with higher-tier retailers. He wants to maintain his niche status, but merely offer more products as a way of serving his customers better. For example, he noted that supermarkets have been steadily adding to natural meats in a way that they haven't in the past. "So, I think that five years from now, all the supermarkets will be having if not complete natural programs, then substantial natural programs in their mix."

Nabors said to keep ahead of that trend, and to maintain his point of differentiation, his stores "will be all organic."